Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 1 NOVEMBER 2000
MR R KING,
MRS K LEEMING
AND PROFESSOR
D MCWILLIAMS
140. To what extent are these costs passed on
to customers? Have some of your members' customers refused to
pay any more so they have to be absorbed by your members themselves?
(Mr King) It is fairly well understood that in terms
of the manufacturing side of the UK, all manufacturers are looking
for significant reductions in their operating costs within the
UK; indeed some of them do not have any funds to pay any increases
at all. We have plenty of our members saying that they cannot
extract any increases in transport costs from their customers,
indeed they are being faced with looking at decreases in order
to make that customer a little more competitive with his European
counterparts. At the very least many of our members do have clauses
in contracts which in theory would enable them to pass on any
fuel increases. Generally speaking only a portion of that, after
a great period of negotiating with the customer, ever seems to
get authorised by the customer. In most cases they say "That's
it. That's all you're getting, in terms of increases this year.
That's the increase we are going to give you to cover fuel costs".
All the other increases an operator might have in wages, vehicle
depreciation, insurance, which have shot up over the last three
or four years so they are at very high levels indeed compared
with where they used to be, have to be absorbed by the haulier
and of course that is putting enormous strain on his cash flow
and the ability to continue to operate as a business.
141. It has been suggested that there is a degree
of overcapacity in your industry. One would imagine that would
tend to force prices down and make people more competitive. Is
that the case? The figure was quoted in a letter from Lord Macdonald,
the Transport Minister, suggesting something of the order of 20
per cent overcapacity. Is this a figure you would recognise?
(Mr King) It is difficult to understand the word "overcapacity"
in an industry so wide and diverse as the haulage industry because
it covers many, many facets from tippers to tankers to general
haulage, delivery, parcels delivery and so on. If, for instance,
you look at the movement of sugar beet in East Anglia, which is
currently taking place, that will involve 5,000 bulk carriers
who will be on contract to move the sugar beet into the sugar
refineries, something like 8.5 million tonnes over a 24-week period.
They need every truck they can get to move the sugar beet but
at the end of the sugar beet campaign, in theory, yes, there would
be overcapacity of those vehicles. They will move on to other
work but it may be more difficult to find work to involve that
entire fleet and some of the vehicles may be laid up. The only
other example we have is that 20 years ago 500,000 HGVs over 3.5
tonnes were moving freight about the UK. That figure is now down
to 422,000. Although of course trucks have got bigger, it perhaps
demonstrates also that they have become more productive, more
efficient and are being worked harder. I would not want to say
that there was a 20 per cent overcapacity. Certainly at times
of the month, for instance at the end of the month, just-in-time
deliveries, many manufacturers do not want goods in on the last
few days of the month because they have to pay for them much faster
than if they get them on the first few days of the next month.
If you checked some hauliers you would therefore find vehicles
parked up in the last week of a month but in the first week of
the month there is probably an undercapacity to move goods. It
is very difficult to say there is an overcapacity. It is a market
driven industry and if there is business there then the industry
will respond.
142. Compared with other countries, do we have
more trucks per pound of GDP or whatever measure you care to use?
How does our freight transport industry relate to other parts
of the European Union in terms of the number of lorries on the
road? Given all the burdens our industry is supposed to be carrying,
according to the evidence we have received, one would imagine
that the numbers would be tumbling in comparison with other countries.
(Mr King) The economy is growing. The changing pattern
of distribution and deliveries to factories has changed also.
There are no longer the great central warehouses where companies
would stock 30, 60 days' supply of alternators for a car factory
for instance. They only want what is sufficient for an hour's
production delivered into them. The haulage industry in the UK
has had to get extremely efficient and productive. To that extent
I think I can say without much debate that we have the most efficient
and productive haulage industry in Europe. Of course ours is slightly
different in structure than elsewhere because geographically the
country is different from, say, France and Germany: distances
are different and more can be done in the truck than perhaps could
be done by the train elsewhere in Europe where distances are considerably
more than you would get in the UK.
(Professor McWilliams) If you want to look at the
efficiency of the industry and the utilisation you really compare
two different things. The first is the average journey length
and the second is the utilisation of any particular vehicle. As
far as average journey lengths are concerned, you really cannot
make a logical comparison between different market structures,
different countries and so on. The average journey lengths in
the UK are shorter but it would be bizarre if they were longer,
given the size of the country and so on. In terms of the actual
utilisation, percentage running empty and that kind of thing,
there is no very good information on it, but my guess would be,
just looking at the overall numbers, that the UK would be between
five and ten per cent higher utilisation rates than the European
average, which is quite a good figure.
143. Do you have any feel for the accuracy or
otherwise of the 20 per cent overcapacity which Lord Macdonald's
advisers—or whoever wrote the letter on his behalf which
he signed—quoted?
(Professor McWilliams) It is a very difficult thing
to measure. At one level—the point Mr King made earlier—there
is difficulty in passing on cost increases. To some extent if
you can say you cannot set your price, it may mean that economically
there is a bit of overcapacity in that sense. To have the capacity
for the industry to be able to pass all cost increases on into
price, would probably mean that there would be technical shortages
from time to time, giving the pricing power to the people in the
industry. What I should be extremely worried about is if someone
used a figure based on the fact that from time to time freight
vehicles run empty, which they actually have to do for technical,
sometimes legislative reasons and translated that number into
an estimate of overcapacity. If they have done that then they
have clearly made a mistake. That is not the way to look at that
kind of issue.
Mr Morgan
144. May I follow up the point about the inability
to pass the costs onto your customer? That implies that the customer
has an alternative which he will go to if one operator puts his
costs up. What are these alternatives? Are they other members
of your Association who are not putting up their costs?
(Mr King) There are alternatives, of course. It is
a competitive business and there is no shortage of companies looking
for work to develop their own business and to engage in new contracts.
There is no doubt that obtaining business and a new long-term
contract with a major customer is a very tedious, time-consuming
and exacting task where the last 0.1 pence in cost has to be evaluated
and cut out of the system. The main issue here is that it is not
a question of playing one haulier off against another, though
there may be some element of that. It is the fact that the customer
simply cannot pass on or cannot absorb any price increases; it
is just not possible if they are to remain viable themselves.
You do meet a sort of Mexican standoff here: the haulier has to
stay in business and perhaps finds he has to continue doing work
at the rate he was using previously even though he needs a higher
rate. I would not want to say that no increases at all are obtainable
from customers because clearly some are available, but not to
cover the rapid increase in costs a haulier has had to face over
the last 12 months or so.
145. What you seem to be suggesting is that
there are customers who for some reason cannot put their prices
up. It would be interesting to identify who these customers are
and what percentage of your customers these people are. Also you
seem to be saying that it is always you who give in rather than
they who give in when it comes to putting up prices. That seems
a bit strange.
(Mr King) There is one government agency which had
in its contract with a haulage business a clause allowing increases
in fuel prices to be passed on. The company doing the haulage
had already obtained an increase in its rates because of fuel
increases. When it went back again for a six per cent increase
the customer was not prepared to entertain that, even though the
contract in theory allowed it and indeed in the end they settled
for three per cent. The operator is only getting half what they
need for the extra fuel costs they are paying and that is from
a government agency. That actually is probably a more generous
concession than you would find for instance in another big customer
up in the North East, Coros for instance, who we do know have
been particularly strident in seeking the very best rates they
can get from their hauliers and that has in many cases precluded
any increase at all.
146. Given that customer, the government agency,
needed to move whatever it was they were moving about the country,
presumably they reckoned that if your member had decided to say
they were walking away from the contract, they could have gone
somewhere else.
(Mr King) Yes, that is a theoretical assumption. That
could have happened and might happen even as we speak. It is entirely
permissible for the haulier concerned or the group of hauliers
concerned to say they cannot move these goods at a price which
is giving them any satisfactory return. I am not sure they have
got to that stage yet, but it demonstrates that the competitive
nature of the industry is such that you cannot automatically adjust
your prices to accommodate pressures of increased costs which
are outside your control.
Mr Butterfill
147. We have had evidence and it is mentioned
in your memorandum that the disparity in the fuel duty costs in
the United Kingdom, not to mention the excise duty as well, is
huge, about two and a half times on average. In your memorandum
your conclusion is that unless the Government takes some pretty
urgent action to remedy this then "... thousands of jobs
and hundreds of millions of pounds will be ... lost this country".
What job losses have your members actually suffered during the
course of this year? Can you give a figure?
(Mr King) It would be difficult to put a figure on
it. There has been not necessarily a hugely discernible trend
in terms of the bankruptcies and hauliers going out of business
because of receivership. What we have seen is a considerable number
just selling up and moving out of the business. They have been
able to meet their costs and their creditors, they have sold their
fleet and terminated their business accordingly. A fairly important
part of the regional or even local transport infrastructure—companies
may have been hauling for farmers—has gone out of business
and that in turn has had an impact upon the farmer who finds that
they cannot get transport for their goods and products at an economic
rate. It is a bit of a vicious circle. It would be very difficult
to put any figures on it. Do you have any?
(Mrs Leeming) No, not figures. The other element of
that is that there is certainly evidence of companies putting
one or two of their vehicles out of operation and just running
a smaller number.
148. It would be very helpful to us if you were
able to dig up some figures which would support these contentions.
How do you think it compares with earlier years? Can you make
that comparison?
(Mr King) The trend is very much a reduction in capacity.
It is likely to accelerate substantially over the next 12 months
or so, if the present position on operating costs, fuel and so
on, remains as it is. What we understand from our members is that
many of them are hanging in there on the basis that things must
get better.
149. Teetering on the brink.
(Mr King) Yes and they are rationalising. If they
had five trucks employing a father and son and three drivers they
are now down to the father and son. The business is still there
but the number of vehicles taken out of that business is quite
considerable.
150. And the number of employees.
(Mr King) Yes; has dwindled.
Chairman
151. Given the fact that these vehicles are
right-hand drive, where are they going? Who is buying them or
are they just not replacing them, they are sending them to a scrap
heap? Frankly so far you have not really given us one bit of evidence
to suggest that there is something other than overcapacity in
the industry and that there is some kind of natural shakedown
process taking place as a result of the buffeting which comes
from the petrol price increases. You have not really given us
any figures at all. It seems ridiculous that you produce very
glossy literature, very attractively produced literature based
on facts which are almost out of date now and we are asking for
things which have happened in the last six months and you do not
seem able to quantify that.
(Mr King) There are 100,000 haulage businesses in
the UK and new ones start up, owner-drivers start up. Maybe they
have bought a vehicle from someone who is rationalising his business.
The best way to check on these figures is to check with the licensing
authorities the number of O licences which are available or in
circulation at the moment. That is a figure which we do not actually
have. From our point of view we would expect to lose and are losing
out of 8,500 haulage members something like 900 a year and replace
them with about 700 new businesses. What we are actually finding
is that the number of trucks actually in circulation is reducing.
We lose a member with 20 trucks and take on a new member with
two. So although the membership remains fairly static, the number
of vehicles in use has reduced. There has been, as a result of
market forces, a reduction in the number of vehicles in use but
that has largely been compensated for by bigger vehicles, more
intensive working, higher productivity, greater efficiency, by
those operators which are in the business of providing haulage.
Looking at the overcapacity side, I would say it could be 20 per
cent. I do not know of any way in which you could actually establish
a positive figure on that.
Mr Butterfill
152. The DTI figures actually show that there
has been a decrease in bankruptcies in your sector since 1992.
Do you dispute the DTI figures or are you saying you are in a
totally new situation which they have not cottoned onto yet because
it has all come so recently? The fuel escalator has been going
for quite some considerable time and although it has come to what
appears to be a crisis point at the moment, one would have thought
it would have been discernible in the DTI figures.
(Mr King) Not necessarily through bankruptcies as
such. An awful lot of people have just sold up. Every month we
get a picture of members who have not renewed their membership
and have folded up their businesses.
Chairman
153. Where are these Marie-Celeste lorries going?
If they are selling up they are obviously not going off the road
and somebody else is utilising them or do we have hidden airfields
somewhere, as we have with motor cars, where we have lorries parked
away out of sight and out of mind?
(Mr King) We certainly do have very large parks of
trucks as a result of leasing programmes by the manufacturers,
but I am not sure that is relevant to what we are discussing at
the moment. You are asking where all these trucks have gone.
154. Where have the lorries gone?
(Mr King) I guess if they have sold up and sold the
land the business is on—many hauliers operate out of yards
which do have some redevelopment potential—that the vehicles
may be fairly old and when we say sold up we mean they have sold
the business, the land it is on, the workshop, for redevelopment
and got out that way. What happens to the trucks I would not want
to say.
Mr Butterfill
155. Are they just not buying new lorries or
leasing new lorries? Is there a discernible reduction in the number
of right-hand drive lorries being purchased or leased from the
manufacturers?
(Mr King) The market for new trucks is particularly
tough at the moment, but I do not think there has ever been an
occasion when it has not been tough. New registrations continue
to take place and you can see on the motorways or roads the number
of fairly modern trucks which are in circulation. It remains a
challenge to sell new trucks but some of the smaller operators
who are ceasing business are not necessarily in the market for
brand new trucks. They are the ones who will buy a used one of
three or four years of age.
Mr Laxton
156. One of the approaches you have taken in
trying to get some analysis of what is happening is you are seeing
a reduction in the number of companies who remain members of your
Association. Might it just be that they wanted to reduce their
overheads and they just cut some of them out by not renewing their
membership. It is hardly a scientific approach, is it, to say
that could be one of the reasons? That is the analysis you are
using. I think you said that you are seeing this reduction in
membership and then you are drawing some conclusion from that
that people are going out of business which is quite contrary
to the figures we have from the DTI. It is not a very scientific
approach.
(Mr King) I would not say that it was not a scientific
approach. We have regional managers who visit these businesses
chasing up membership renewal and if the proprietor says he is
not renewing because he is packing up the business or he cannot
afford the £200 or £300 for membership this year, we
will know that is the case. Indeed if they have gone bust we know
the reason why they are not renewing membership. What we have
seen is that there is a trend towards people actually getting
out of the industry and realising the assets they have.
157. Do you acknowledge that there has not been
a trend of people going into bankruptcy to any great degree? It
is people selling their business on elsewhere.
(Mr King) Yes, the figures are there, the level of
bankruptcy as such has not rocketed in the way that perhaps some
might have assumed.
158. It has decreased from 1992.
(Mr King) Yes, but that does not indicate really whether
the structure of the business is changing. Many businesses are
not renewing their O licences or are just going out of business
in a voluntary way.
(Professor McWilliams) There has been a reduction
in the number of trucks on the road; a reduction of roughly 100,000
has taken place over a ten-year period. The biggest pace of reduction
was in the early 1990s but the interesting thing is that since
the economy has recovered through the 1990s and into the twenty-first
century the number of lorries on the road has been flattish, changed
a little bit from year to year. Sales of new lorries peaked at
90,000; I do not have the precise numbers with me but around about
90,000 at the end of the 1980s. The present figures are something
like 45,000 a year and they dropped to a lowest point of about
26,000 in the early 1990s, probably 1992 or 1993. I am sorry,
I do not have all these figures in my mind. However, that is really
what has been happening to the industry and it has contracted
in terms of number of lorries, partly as a result of increased
penetration from overseas and partly as the result of increased
efficiency of the domestic industry. Bankruptcies were at an all-time
peak in 1992 for the sector because that is the point where the
industry went through its greatest restructuring. With respect,
that is probably not the best period to make a comparison from.
It is perfectly true that bankruptcies today are at a lower rate.
We have not yet seen the impact of the latest fuel price rises
on bankruptcies and we probably will not get those in the figures
for some 18 months, so we will not yet be certain. I should be
surprised if they went up quite as high as they went up then because
that was a period of most intense pain for the industry. It is
certainly true that bankruptcies in the industry are starting
to rise now and I should expect to see them going up further over
the next 18 months.
Mr Morgan
159. Do you have any figures for the amount
of goods being moved by your members or by the UK industry? How
has that changed over the period we are talking about? Presumably
that is really what we are interested in. It is not how many lorries
we have, it is whether we are moving goods about the country.
(Professor McWilliams) The growth through the period
when the economy has been growing reasonably well, in terms of
tonnes/kilometres, which is probably the best complete measure
of this, has been running at round about four per cent per annum;
sometimes a bit above that. It has been a bit patchy, to do with
the industry cycle, but essentially it has been running round
about that, which compares with GDP growth over this period of
just a bit over 2.5 per cent. In theory, in normal circumstances,
you would have expected the jobs in the industry probably to be
rising as a proportion of the whole in line with the rise in the
share of the industry in GDP. That does not appear to have happened.
It appears that the jobs in the industry have been pretty flat
compared with a general rise in employment as the economy has
grown and after a fairly severe contraction in the industry in
the early 1990s.
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